Fitch Rates Stanford University, CA T-5 Refunding Revs 'AAA'

Business Wire, June 12, 2009

NEW YORK -- Fitch Ratings assigns an 'AAA' rating to Stanford University's (Stanford) refunding $51,255,000 revenue bonds (the bonds) series T-5 issued through the California Educational Facilities Authority (CEFA). The bonds are expected to price via negotiated sale the week of June 15, 2009. Proceeds are expected to partially refund outstanding CEFA series P bonds.

In addition, Fitch affirms the outstanding ratings on Stanford's debt portfolio as follows:

--$723 million CEFA fixed rate bonds at 'AAA';

--$1 billion taxable fixed rate bonds (series 2009A) at 'AAA';

--*$265 million CEFA variable rate bonds and notes at 'AAA'/'F1 ';

--$350 million taxable and CEFA $300 million tax-exempt commercial paper (CP) programs at 'F1 ' (approximately $67 million and $93 million of taxable and tax-exempt CP is currently outstanding).

Revenue bonds represent an unsecured general obligation of Stanford. The Rating Outlook for all long-term debt is Stable.

The long-term 'AAA' rating continues to reflect Stanford's superior credit standing, which results from its consistently strong financial performance and vast resource base; industry leading fundraising activity; outstanding student demand; world-class research programs in environmental, medical, and engineering sciences, among others; and a highly experienced management team that excels in comprehensive strategic and financial planning.

The short-term 'F1 ' rating is supported primarily by Stanford's significant amount of highly liquid, high-rated securities that would be available to pay for tendered variable rate demand bonds (VRDBs) and/or maturing CP. The short-term rating is also supported by institutionalized procedures that provide for a timely flow of funds in the unlikely event of a failed remarketing of VRDBs or rollover of CP.

While overall credit risks remain minimal, Stanford's debt profile has increased substantially over the past five years as its expansive size and operating scope has warranted significant on-going investment in academic, housing, and research facilities. Following the May 2009 $1 billion taxable issuance (series 2009A) and including the university's potential borrowings under its various short- and medium-term debt programs to finance capital projects on an interim basis, Stanford will have approximately $2.3 billion in pro-forma debt outstanding, with authorization for up to $2.8 billion. While the $2.3 billion of pro-forma debt represents almost a doubling of financial leverage since fiscal 2005, Stanford's strong operating margins and available funds, defined as cash and investments not permanently restricted ($17.5 billion at Aug. 31, 2008), enables the university to manage the increased obligations. Although roughly 67% of Stanford's investment holdings ($21.8 billion as of Aug. 31, 2008), which are included in available funds, were classified as less liquid alternative assets, the ability of Stanford's management team to both track and ensure sufficient liquidity needs for operating, capital, and investment purposes is among the best in the higher education industry.

Stanford's fiscal 2008 operating margin of 8.6% represented its strongest level of performance in the past five fiscal years. Contributing significantly to this level of performance was the increase in the target payout from endowment funds invested within its merged investment pool from 5% to 5.5%. As a result of this change in target payout, coupled with the university's decision not to employ its smoothing formula, the payout to operations increased by approximately 45%, from approximately $541 million in fiscal 2007 to $832 million in fiscal 2008. The vast majority of funds distributed for operations as a result of the increased payout were applied by Stanford to support program activities freeing up other unrestricted funds to support capital projects and other infrastructure needs. Investment income, including the payout from endowment funds, represents an important revenue source for Stanford, equaling approximately 28.6% of fiscal 2008 operating revenues. Other important sources of funding include grants and contracts (31%), student tuition and fees (11.6%), net of financial aid, and healthcare services (10.7%). Although current year gifts used in support of operations decreased by $16 million, to approximately $182 million, such level of unrestricted giving remained important to Stanford, accounting for approximately 5.2% of fiscal 2008 operating revenues.

In light of current economic conditions, including severe financial market turbulence which has contributed to an approximately 25.8% reduction in Stanford's total investments since the close of fiscal 2008, management has undertaken aggressive measures to trim operating and capital spending for fiscal 2010. On the operations side, measures include reducing departmental budgets; implementing university wide salaries freezes and delaying faculty searches; and, in anticipation of an approximately 30% loss on long-term investments by Aug. 31, 2009, reducing amounts paid on Stanford's endowment funds to support operations by 10% in fiscal 2010 and 15% in fiscal 2011.